Regional forex set for another fraught week

Regional forex set for another fraught week

SINGAPORE (Reuter): Jangled nerves on Asian regional foreign
exchange markets are unlikely to be soothed much this week, as
traders keep a wary eye out for fresh sideswipes on the political
or economic fronts.

Amid the kind of mayhem not seen since the Thai baht's
flotation in July, there were some precipitous falls last week,
with the Indonesian rupiah, Malaysian ringgit and Philippine peso
all plunging to new lows.

After the recent drubbing, sentiment is pretty much at rock
bottom but any adverse news will still send corporate investors
scrabbling to hedge local currency exposure with U.S. dollars,
analysts said.

While many traders are happy to keep clear of the whipsaw
markets, there is a compound effect as quite a few are still
happy to jump aboard the bandwagon when corporate orders get it
rolling.

"Poor sentiment is playing a part but in the case of Indonesia
for example it's quite clear there is a very big concern on the
part of corporates about the losses they are accepting," said
Larry Hatheway, chief economist at UBS in Singapore.

Given private sector debt is about US$60-65 billion and the
dollar has risen over 50 percent against the rupiah you run into
estimates of balance sheet losses in the region of $15 billion.
That is assuming most debt held was unhedged.

"With really no end in sight as to how far the rupiah can fall
it's quite clear, even though it's quite expensive in terms of
the forward points you pay away, that it's probably time to hedge
if it's not too late," Hatheway added.

"These falls are fundamentally driven given the amount of
hedging activity we are seeing."

The other major worry among overseas investors who still have
money tied up in the region is the shaky financial sector, and
problems here spread right across the region.

"The common theme that is running throughout the region right
now is a financial sector that people view as vulnerable," said
Chiang Yao Chye, Head of Asia Pacific Research at CIBC in
Singapore.

"Thailand's financial sector collapsed just like that, and
there is concern as to whether any of the others are going to go.
Malaysia, the Philippines and Indonesia obviously suffer to a
large extent from this."

So, poor sentiment, corporates continuing to hedge and
overseas investors worried about the financial sector are all
driving currencies lower. Is there anything else?

The answer is yes, two things, politics and the need to act on
recent promises to fix acute economic imbalances.

These are really two side of the same coin and analysts say
unless politicians get serious, and start to deliver on economic
reform, regional currencies will continue to slide.

Malaysian Prime Minister Mahathir Mohamad sent overseas
investors running for cover, sparking a four percent fall in the
ringgit last Wednesday, by again calling for greater regulation
of currency markets.

He repeated his call for tighter curbs at the weekend during a
visit to the Argentine capital Buenos Aires.

But Malaysia, and others in the region, depend heavily on
overseas investment and this kind of talk simply frightens fund
managers who will obviously not want to invest in a country where
the regulatory door might be slammed in their face.

There is then the question of politically unpopular measures
to heal the regional economies such as Thai Prime Minister
Chavalit Yongchaiyudh's promise to cut billions of baht from the
budget next year in order to meet the International Monetary
Fund's target of a small budget surplus.

Likewise in Malaysia there has been nice sounding rhetoric
about scaling back large-scale infrastructure projects.

But unless governments deliver and attempt to address some of
the huge economic imbalances, the markets will not give them the
benefit of the doubt.

"All these currencies are vulnerable until the governments
step up to the plate, do what they say they are going to do and
take solid action," UBS's Hatheway said.

Here is the latest state of play of the regional currencies in
terms of their fall against the U.S. dollar since the crisis
began. The reference point is the close on July 1 to the close on
Friday October 3.

Percentage changes have been calculated as the local
currency's fall against the dollar not the dollar's rise against
the local currency.

July 1 Oct. 3 Fall (%)
Malaysian ringgit 2.5240 3.3700 - 25.1
Indonesian rupiah 2,431.00 3,690.00 - 34.1
Thai baht (onshore rate) 25.880 36.35 - 28.8
Philippine peso 26.35 34.60 - 23.8